Cooking the Books: Who Pays the Working Poor?

‘Better Than Raising the Minimum Wage. Help Americans who need it with a major, carefully crafted expansion of the Earned Income Tax Credit’, was the title and subtitle of an article in the Wall Street Journal (21 May) by Warren Buffett, one of the world’s richest capitalists.

His argument was that the modern economy requires more and more skilled jobs and fewer and fewer simple, unskilled ones and that, as a result, there are now fewer jobs for those capable only of doing unskilled work. As he put it, this

‘is simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks. The remedy usually proposed for this mismatch is education … But even with the finest educational system in the world, a significant portion of the population will continue, in a nation of great abundance, to earn no more than a bare subsistence.’

According to him, raising the minimum wage other than marginally won’t solve this problem but would in fact make it worse because it would drive out of business small employers who could not afford to pay it. He’s got a point. No employer will take on someone whose labour can’t produce them an adequate profit, in some cases which doesn’t even reproduce the value of the labour power they purchase.

He proposes instead to use the tax system to pay a tax credit to workers incapable of commanding a wage above the poverty line. This exists in the US under the self-explanatory name of ‘Earned Income Tax Credit’. It is in effect a subsidy to employers as it allows them to pay below-poverty-line wages knowing that the state will top up their employee’s income to this level.

A similar scheme exists in Britain, introduced by Gordon Brown in 2003 when he was Chancellor. But while Buffett wants to increase payments in the US George Osborne announced in the July budget that they are going to be cut. The arguments used were revealing, openly admitting that tax credits are a subsidy to employers. Rachel Sylvester, in her column in the Times (23 June) quoted an ally of Ian Duncan Smith, the Work and Pensions Secretary, as saying:

‘You’ve got some big businesses that are making huge profits but paying their workers poverty wages. They get away with it because workers are supplemented by the tax credit system but why should ordinary taxpayers subsidise these companies?’

Unlike Buffett, the government here wants to increase the minimum wage (renamed in Orwellian a ‘Living Wage’), so shifting the burden of paying for the working poor from the state to employers.

Clearly, then, there is a dispute within pro-capitalist circles as to how to deal with the problem of workers unable to sell their low quality, ‘commodity-like’ ability to work for a so-called ‘living wage’. Does the state try to make employers pay them a living wage? Or does it top up the low wages which are only what employers are prepared to pay? Or again, does it simply pay them ‘welfare’ for not working?

In the end, as with many political issues, it comes down to which section of the capitalist class should bear ‘the burden’. The last two options involve taxing the capitalist class as a whole, one of them to subsidise some employers. In practice, the first does too in the end as a higher minimum wage increases the number who are ‘unemployable’ and so dependent on a handout from the state.